The Global Spotlight on Trump’s Victory
The world’s attention is fixed on the outcome of what many have called one of the most divisive U.S. elections in recent history. Yet the results are anything but close, with a Republican sweep across the Senate, likely the House of Representatives, and, of course, the presidency, secured by Donald Trump. Businesses and governments worldwide are now asking how a second Trump presidency will affect them. Given Trump’s notorious unpredictability, the answer for many is not straightforward. At MCP, we’re asking the same for Emerging Markets and, despite the often pessimistic narrative, we’ve identified several potential silver linings in a Trump presidency.
Trump’s Domestic Economic Policies:
Trump positions himself as a champion of "the people," and if that term refers to America’s wealthiest individuals and business leaders, he may be right. A central pillar of his domestic economic agenda is tax cuts, and with a Republican majority, an extension of the 2017 Tax Cuts & Jobs Act is highly likely. This act established a flat corporate tax rate of 21% and lowered individual tax rates, with the wealthiest Americans seeing the greatest benefit. Additionally, Trump has consistently advocated for deregulation, especially in sectors like digital assets and non-renewable energy.
Much like the pre-election polls, economists are divided on whether Trump’s next term will ultimately harm or hinder the U.S. economy in the long term. However, there is general consensus that, in the short term, Trump’s pro-business policies are likely to stimulate US economic growth. Herein lies the first silver lining for EM: a strong US economy has positive spill over effects on the global economy as it boosts demand from U.S. consumers for EM exports.
Trump, Trade and Tariffs:
However, the subject of Trump and trade is particularly sensitive for EM and Trump’s clear ‘America First’ stance is hard to ignore. Trump has been outspoken about his support for tariffs, yet both DM and EM may be left out in the cold as Trump has threatened a universal 10-20% tariff on all trading partners and indicated replacing income tax with tariff revenue via the proposed "Trump Reciprocal Trade Act." That being said, China will clearly be the most effected with Trump advocating for a 60% tariff on Chinese imports.
It may be wise not to take such threats at face value. Trump himself has described tariffs as a powerful negotiation tool and he might actually use them as such. The reality is that the U.S. remains heavily reliant on imports, particularly from China, whose production capacity is unparalleled. Although there is momentum behind reshoring manufacturing, reducing the U.S.’s global trade deficits through this approach is likely a long-term endeavor, potentially spanning decades. This economic interdependence could restrain Trump’s ability to impose sweeping punitive trade measures without risking inflation and considerable supply chain and economic disruptions domestically.
Differing Impact on EM Regions:
While finding a silver lining in China itself may be challenging, it’s much easier to spot ones in countries like India, Indonesia, Vietnam, Malaysia, and Mexico. These nations, known for their low-cost manufacturing, are set to become even more attractive to FDI as the global shift to "China+1" accelerates. As higher tariffs on China undermine its cost competitiveness, supply chain gaps will emerge, offering these countries opportunities to meet the demand and capture a larger share of global manufacturing. This increase in production could help offset the negative effects of higher tariffs on their exports to the U.S.
Moreover, escalating U.S.-China trade tensions could create opportunities for other EM to strengthen their trade relationships with China. For example, during the trade war in 2018, China shifted from importing U.S. soy beans to sourcing them from Brazil. Similar patterns of retaliation could benefit countries with strong trade ties to China or those that produce goods that can replace US exports.
Resilience in EM:
Emerging Market companies have demonstrated their resilience, thriving even amidst geopolitical and economic uncertainties, thanks to robust business models, innovation, and strong growth prospects. Structural advantages such as favourable demographics, higher GDP growth projections, and ongoing digitalisation ensure that EM will remain competitive, despite potential tariff-related challenges.
While Trump's presidency introduces a degree of unpredictability, more clarity over Trump’s intentions in the months ahead along with administration appointments is expected to reduce short-term market volatility. Although Trump’s policies pose risks to the global trade order, the outlook for EM is not all doom and gloom. In fact, certain EM regions stand to benefit from new growth and investment opportunities stemming from shifts set to accelerate under Trump such as China+1. We are confident that this resilient asset class will navigate these turbulent times as effectively as it did during Trump’s first presidency, during which the MSCI EM Index delivered a 57% return in USD terms1.
1 Bloomberg: From 20 January 2017 – 20 January 2021